Berkshire Hathaway (BRK.B) recently reported on a 13-F filing that it had raised its stake in Occidental Petroleum Corp. (OXY). It now owns over 25% of OXY's shares, including warrants to buy at $59.624 per share.
For example, Buffett's company reported on Aug. 13 that it had bought 13.179 million shares. That brought its total to 224.129 million shares, which apparently includes 83.858848 million warrants allowing Berkshire to buy shares at $59.624 per share.
As a result, since OXY stock trades today at $62.42 per share, its warrants are “in-the-money.” That means that it is profitable for Berkshire to exercise those warrants and buy OXY stock at a reduced price of $59.624.
Berkshire Now Owns 25% of OXY
Now, since OXY recently reported on Aug. 2 that it had 884.681888 million shares outstanding, that puts Berkshire's stake at over 25% (i.e., 224.129m shs /884.6819m shs = 25.33%.
This may mean that effectively Berkshire controls Occidental Petroleum under certain securities laws and rules. It may mean that Berkshire is considered a beneficial owner that is able to exercise a controlling influence on Occidental.
This is also on top of $8.621 billion of Occidental preferred stock that Berkshire Hathaway owns. Those preferred shares pay Buffett's company 8% interest annually. Berkshire has begun liquidating those preferred shares by selling them back to Occidental, but it can keep them up until 2029. This is based on Note 5 to Berkshire's recent quarterly filing.
That is also when the warrants to buy OXY stock must be exercised or they will expire one year later after the preferred stock is redeemed. In other words, Berkshire still has until 2030 to 7 years to buy OXY stock at this very attractive price.
Why Berkshire Is Still Buying OXY Stock
That is one reason you can expect to see Berkshire keep on buying the shares. So far it does not appear that Berkshire has been exercising its options, as it considers OXY stock very attractive.
Another reason is that Occidental has been aggressively buying back its own shares. For example, in the last six months, Occidental has repurchased $1.2 billion of its own shares as part of its $3.0 billion buyback program.
That program effectively represents 5.48% of its $54.7 billion market capitalization. In other words, Berkshire Hathaway's stake in OXY stock is automatically rising by 5% or more each year. So why not buy more?
That makes perfect economic sense, especially for such a profitable company.
More Reasons
That brings up the 3rd reason. Occidental Petroleum pays a dividend with a 1.15% yield and has a low price-to-earnings (P/E) multiple. For example, analysts surveyed by Seeking Alpha project $3.67 in earnings this year. That puts its P/E multiple at 16.8x.
While not very cheap compared to other oil and gas stocks, this is still attractive to Berkshire since the earnings are consistent. It is also less expensive than other S&P 500 stocks it might otherwise buy.
Moreover, Occidental is still producing over $1 billion in free cash flow before working capital changes each quarter. This is even after it has been raising its capex spending to $1.6 billion in Q2.
The bottom line is that this FCF allows Occidental to keep on buying back $750 million in its shares on average (i.e., $3 billion annually) since the FCF is over $1 billion.
It also allows OXY to spend $344 million in cash dividends every quarter at today's rate of 72 cents per quarter. In fact, as the shares decrease this quarterly dividend cost falls - at least until the company raises the quarterly rate.
As a result, investors should expect that Berkshire Hathaway will keep buying more OXY stock each quarter.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
